<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996 or
-----------------
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ___________________________
Commission file number 0-28206
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Integrated Systems Consulting Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2528944
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 East Swedesford Road, Suite 200, Wayne, PA 19087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 989-7000
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
------------------- -----------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.005 per share
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of January 31, 1997, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $42,492,269. For purposes of this calculation,
shares of Common Stock held by directors, officers and stockholders whose
ownership exceeds five percent of the Common Stock outstanding at January 31,
1997 were excluded. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
As of January 31, 1997, there were 7,883,201 shares of the Registrant's $.005
par value common stock outstanding.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Integrated Systems Consulting Group, Inc. ("ISCG" or the "Company") provides
consulting services that address its clients' information processing needs
through technologically advanced solutions, including client-server
architecture, Graphic User Interface ("GUI") based applications, relational and
object oriented databases and cross-platform applications integration. The
Company delivers consulting services in two broad areas: applications
development and network management. In the applications development area, the
Company provides expertise to its clients in the full software development life
cycle or one or more discrete phases within such process. The Company's
applications development activities accounted for approximately 78.4% and 79.3%
of its revenues in 1995 and 1996, respectively. In the network management area,
the Company provides expertise to its clients in the design, implementation,
management and support of multi-vendor local and wide area networks, desktop
computer systems and servers. The Company's network management activities
accounted for approximately 21.6% and 20.7% of its revenues in 1995 and 1996,
respectively.
The Company provides consulting services to businesses in a variety of
industries, particularly the pharmaceutical, biotechnology, chemical and
software industries. In recent years, however, the Company has principally
focused its marketing efforts on the pharmaceutical industry in order to exploit
more effectively its extensive experience in the development, implementation,
integration and management of information systems used in connection with the
drug development process. By virtue of this experience, the Company's technical
employees have developed a strong understanding of the drug development process
and broad expertise in the information systems and software applications
required to support this complicated and data intensive process. In addition,
the Company's technical employees have developed a broad range of technical
skills and capabilities with respect to commercially available packaged software
products that address drug development information processing requirements.
Pharmaceutical company engagements accounted for an aggregate of approximately
$8.3 million, $13.5 million and $18.0 million or 61.5%, 64.3% and 58.8% of the
Company's revenues in 1994, 1995 and 1996, respectively.
The Company was incorporated in the Commonwealth of Pennsylvania in 1988. The
Company completed its initial public offering of common stock in May 1996
pursuant to a rights offering to the stockholders of Safeguard Scientifics, Inc.
The Company's principal executive offices are located at 575 East Swedesford
Road, Suite 200, Wayne, Pennsylvania 19087, and its telephone number is (610)
989-7000. The Company's World Wide Web homepage address is http://www.iscg.com
and its e-mail address is [email protected].
ISCG's Consulting Services
The Company delivers applications development consulting services primarily by
providing staff augmentation to its clients on a time and materials basis.
Clients typically have utilized the Company's services in this format for
assignments that encompass all aspects of the software development life cycle.
The Company also delivers applications development consulting services on a
project basis by providing full software development life cycle services at its
and its clients' facilities. The Company also delivers network management
consulting services primarily by providing supplemental staff to its clients.
The foundation of the Company's consulting skills is its overall focus on
maintaining its expertise in advanced information processing technologies. In
deploying these technologies, the Company provides expertise in client-server
architecture, GUI-based applications, relational and object oriented
databases, cross-platform applications integration and network management
services.
Applications Development Services
The Company's applications development consulting group is organized in three
practices, which represent the Company's primary areas of technical expertise:
pharmaceutical research systems, document management systems
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and client-server systems integration. The Company's applications development
engagements typically involve disciplines from, and the Company's technical
employees generally are involved in, more than one, if not all, of these
practices. Currently, approximately 100 of the Company's technical employees
perform client applications development services in ISCG's in-house applications
development center. The remaining technical employees perform client work at the
respective clients' sites.
Pharmaceutical Research Systems Practice. The Company's technical employees in
this practice specialize in the analysis, development and integration of
software solutions that support the research groups of pharmaceutical
organizations. These technical employees are knowledgeable with respect to the
research groups' focus on the collection, analysis and management of clinical
and pre-clinical data required for Investigational New Drug Applications and New
Drug Applications ("NDAs"). The Company's technical employees have extensive
experience in the development and deployment of customized systems for these
divisions. In addition to custom development, the Company's technical employees
have integrated and customized commercially available applications software from
a number of vendors including DLB Systems, Inc. ("DLB"), Domain Solutions
Corporation, Clinarium and the SAS Institute. The vast majority of these
integration efforts include an extensive migration or conversion process for
crucial existing data.
Document Management Systems Practice. The Company's technical employees in this
practice help clients design and build document management systems. These
technical employees are particularly knowledgeable in the documentation
requirements of the pharmaceutical regulatory approval process, as well as in
the software technologies applicable to that process. The Company customizes
packaged software products such as Documentum, Inc. ("Documentum") to support
the preparation and submission of NDAs. This includes the creation of systems
that track and manage clinical documents and support the automated assembly of
regulatory submissions. This customization includes the development of user
interfaces implementing GUI-based products such as Microsoft's Visual Basic and
Visual C++ and Powersoft's PowerBuilder and the creation of document databases
using packaged software products provided by Documentum.
Client-Server Systems Integration Practice. The Company's technical employees in
this practice specialize in the architecture, development and integration of
client-server systems using integrated development environments that include
computer-aided design tools, GUIs and state-of-the-art database technologies.
GUI development platforms include Borland's Delphi, Powersoft's PowerBuilder,
Microsoft's Visual Basic, Access and Visual C++ and Oracle's Designer/2000 and
Developer/2000. Database technologies used by this group include products from
Oracle, Sybase, Informix and Microsoft, and operating systems such as Hewlett
Packard's HP/UX, Digital Equipment Corporation's OpenVMS, Sun Microsystems'
Sun/OS and Solaris, Microsoft's Windows NT, International Business Machines'
OS/2 and SCO UNIX. In addition to application development and integration
services, this group also provides database administration, capacity planning
and migration services.
Network Management Services
The Company's network management services provide clients with expertise in the
evaluation, selection, design, implementation and support of local and wide area
networks. Examples of the varied functions performed by the Company's technical
employees include multi-network integration, desktop system installation and
management, server management, capacity planning, performance analysis and Lotus
Notes administration and development. The Company's technical employees
specialize in UNIX, Open/VMS and Lotus Notes technologies, but their technical
skill set spans a wide range of network software technologies, including Hewlett
Packard's HP/UX; Sun Microsytems' Solaris; International Business Machines' AIX
and OS/2; Digital Equipment Corporation's Open VMS, PATHWORKS, Alpha and
Clusters; Microsoft's Windows NT and LAN Manager; Novell's Netware; and TCP/IP.
Consequently, the Company is able to provide network management services in
diverse client environments.
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Sales and Marketing
The Company has a direct sales force, consisting of a Vice President of Sales,
two sales managers and eight account executives, that is responsible for all
phases of the selling process in the continental United States. One account
executive is located in the Princeton office and one account executive and two
senior technical employees who provide sales support are based in the Chicago
office, which the Company established in August 1996. The remainder of the
direct sales force is based in the Company's Wayne, Pennsylvania headquarters.
The efforts by the Company's sales force are supplemented by its technical
employees, who, in the past, have been able to expand existing engagements and
generate new business while on assignment at clients' sites. Although the
Company does not have an international marketing organization, it has secured
limited overseas engagements from multi-national organizations for which it has
performed services domestically.
The Company's marketing efforts are primarily focused on expanding its name
recognition and its technical reputation in the pharmaceutical industry, its
largest marketplace, and the document management market. The Company's sales
team has exhibited at pharmaceutical trade association, technical and vendor
user group conferences that focus on document management, adverse events
reporting and clinical data management, and plans to increase the number of
conferences it attends in the pharmaceutical, biotechnology and medical device
industries.
The Company also periodically writes and distributes "white papers" or case
studies about its experiences in utilizing a variety of leading edge
technologies. These white papers are often delivered at trade association
conferences and are routinely distributed to current and prospective clients.
The purpose of these publications is to create and enhance the Company's image
as a technology leader.
The Company views existing clients as a valuable source of additional work in
the form of both extensions to, and expansion of, ongoing engagements, and the
initiation of new engagements. The Company seeks to establish long-term
relationships with clients in which clients rely on the Company for ongoing
information technology solutions. These types of relationships have helped
create stable revenues for the Company. In 1994, 1995 and 1996, approximately
$12.0 million, $18.5 million and $26.2 million, respectively, of the Company's
revenues were derived from clients to which it had provided services in the
previous year.
Vendor Relationships
The Company has established non-exclusive partnership arrangements with two
software vendors, Documentum and DLB, each of which markets products to the
pharmaceutical industry. The Company's history of integrating their software
products into clients' systems has led to strong relationships with these
vendors which enhances the Company's marketing efforts. These partnership
arrangements position the Company as a potential systems integrator should
clients or prospective clients select one of these vendors' products. These
relationships have often resulted in sales leads and the generation of client
engagements. However, in order to retain its objectivity in evaluating clients'
needs and designing solutions, the Company has avoided creating relationships
with these software vendors pursuant to which it earns fees or commissions on
the sale of particular software products.
In partnership with other software vendors, such as Oracle Corporation and
Borland International, Inc., the Company provides training courses in the
vendors' respective technologies to clients. These joint training activities
generally strengthen the relationship between the Company and these vendors,
enhance the Company's market position with the vendors' products, create
consulting opportunities, train the Company's technical employees in strategic
technologies at lower costs and introduce potential clients and allow current
clients a closer view of the Company.
Concentration and Mix of Revenues
Historically, a small number of clients have each accounted for 10.0% or more of
the Company's revenues. In 1994, Merck & Company, Inc. ("Merck") accounted for
approximately 17.2% of the Company's revenues. In 1995, Air Products and
Chemicals, Inc. ("Air Products") and Merck accounted for approximately 12.7% and
10.9% of revenues,
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respectively. In 1996, Air Products and Merck each accounted for approximately
10.0% of revenues. Engagements by pharmaceutical companies accounted for
approximately 61.5%, 64.3% and 58.8% of the Company's revenues in 1994, 1995 and
1996, respectively.
Employees
General
As of December 31, 1996, the Company had 385 employees, comprised of five
members of senior management, 32 administrative personnel, 17 technical service
managers (including one member of senior management), 313 other technical
employees, eight recruiting personnel and 13 sales and marketing personnel
(including one member of senior management and one administrative person). The
Company believes that its future success will depend in large part upon its
ability to attract, retain and motivate highly skilled employees, particularly
technical employees.
None of the Company's employees is subject to a collective bargaining agreement.
The Company believes its relations with its employees are excellent.
Recruiting
The Company uses a variety of techniques to identify qualified candidates for
recruiting. The Company's most successful source of new employees is its
employee referral program. This program encourages employees to recommend or
refer qualified candidates for employment with the Company. The Company also
places advertisements in various newspapers and trade magazines and has utilized
professional search firms to identify candidates for hire.
Training
The Company has established an extensive educational facility at its
headquarters comprised of three training rooms that accommodate a total of 50
students. Both vendor training and Company designed and conducted evening school
classes are provided to the Company's technical employees.
Competition
The commercial professional services segment of the information technology
industry includes a large number of participants and is highly competitive. The
industry includes participants from a variety of market segments, including
systems consulting and integration firms, contract programming companies,
application software firms, the professional service groups of computer
equipment manufacturers, such as IBM and Digital Equipment, "Big Six" consulting
firms and general management consulting firms. The Company's competitors include
international companies such as Andersen Consulting, Technology Solutions
Corporation, Cap Gemini America, Computer Sciences Corporation's consulting
division, Electronic Data Systems Corporation and Cambridge Technology Partners,
Inc.
Many participants in the commercial professional services segment of the
information technology industry have significantly greater financial, technical
and marketing resources and have greater name recognition than the Company. In
addition, this industry is highly fragmented and served by numerous firms, many
of which serve only their respective local markets. The Company also faces
competition from organizations providing staff augmentation services to, and
individuals who contract directly with, information systems departments of
existing and potential clients. The Company believes that the principal
competitive factors in the commercial professional services segment of the
information technology industry include responsiveness to client needs,
availability of technical personnel, speed of application software development,
quality of service, price, project management capability and technical
expertise.
5
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The Company's current clients can generally be described as being located in the
eastern United States. It has a growing client base in the midwestern United
States, however, which it serves through the Chicago office. In addition,
certain of the Company's clients are located in Europe. The Company believes
that geographic location with respect to the performance of technical services
has become a lesser competitive factor in the United States, although the
existence of a sales office in a particular region can facilitate the sales and
marketing process. The Company believes that having an international sales and
operating presence is an important competitive factor in competing on an
international basis.
The Company also believes that its ability to compete depends in part on a
number of competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate qualified technical personnel, the
ownership by competitors of software used by potential clients, the development
of software that would reduce or eliminate the need for the Company's services,
the price at which others offer comparable services and the extent of its
competitors' responsiveness to customer needs.
Intellectual Property
The Company's business is not dependent on the ownership or exclusive use of any
specific information technology. The Company holds no patents or registered
copyrights. The Company's business does, however, include the development of
custom software applications in connection with specific client engagements.
Ownership of such software is generally assigned to the client. Although the
Company believes that its services do not infringe on the intellectual property
rights of others, there can be no assurance that such a claim will not be
asserted against the Company in the future or, if asserted, that the Company
will be able to successfully defend against any such claim.
The Company relies upon a combination of trade secret, nondisclosure and other
contractual arrangements to protect its and its clients' proprietary rights. The
Company generally enters into confidentiality agreements with its clients and
potential clients and limits access to, and distribution of, its clients' or
software vendor partners' proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of the Company's, its clients' or vendor partners' proprietary
information or that the Company will be able to detect unauthorized use or take
appropriate steps to enforce its clients' and vendor partners' intellectual
property rights. In addition, all of the Company's employees execute restrictive
covenants upon joining the Company that require the employee to keep
confidential all proprietary information pertaining to the assets or business of
the Company and its clients and provide that during the term of employment, and
for a certain time period thereafter, the employee may not be employed by,
solicit, or provide consulting services for any past, current or potential
clients of the Company.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 36,000
square feet of leased space in Wayne, Pennsylvania. This lease expires in 2000.
The Company leases an additional 12,500 square feet of space in an office
complex near its headquarters, in which is located part of ISCG's software
development center. By July 1997, this space is expected to accommodate up to 65
technical employees.
The Company also leases 2,550 square feet of space in Princeton, New Jersey,
where the Company conducts sales and marketing and recruiting activities and
performs small client projects. This lease expires in 1998, but is subject to
the Company's option to extend the term for three additional years.
Currently, the Company leases shared facilities in Chicago, Illinois pursuant to
a short-term agreement.
The Company anticipates that additional space will be required as business
expands and believes that it will be able to obtain suitable space as needed.
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ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, there are no material legal proceedings pending
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
7
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market System
("Nasdaq") under the symbol "ISCG." The following table sets forth, for the
calendar periods indicated, the range of high and low sale prices for the
Company's Common Stock on Nasdaq. These prices do not include retail mark-up,
mark-down or commissions.
1996 High Low
---- ---
Second Quarter (commencing April 18)........... $30.00 $16.25
Third Quarter.................................. 21.50 13.25
Fourth Quarter................................. 20.75 11.50
As of January 31, 1997, there were approximately 541 holders of record of the
Company's common stock.
To date, the Company has not paid any cash dividends on its Common Stock. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends, if any, will depend, among other
things, on the Company's results of operations and financial condition, any
restriction in the Company's loan agreements and on such other factors as the
Company's Board of Directors may, in its discretion, consider relevant. The
Company's bank loan agreement currently prohibits the payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for each of
the years in the four-year period ended December 31, 1996 have been derived from
the Company's consolidated financial statements, which have been audited by KPMG
Peat Marwick LLP, independent auditors. The selected consolidated financial data
at December 31, 1992 and for the year ended December 31, 1992 have been derived
from the Company's unaudited consolidated financial statements, which include
all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of the data for such
period. The consolidated balance sheets as of December 31, 1995 and December 31,
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996 and the report of KPMG Peat Marwick LLP thereon are included elsewhere in
this Report. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and the notes thereto and
other financial information appearing elsewhere in this Report.
<TABLE>
<CAPTION>
========================================================================
Years Ended December 31,
In thousands, except per share data
Statement of Operations Data: 1992 1993 1994 1995 1996
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $6,729 $9,461 $13,543 $21,024 $30,607
Operating expenses:
Direct costs......................................... 4,035 5,632 8,111 12,559 17,497
Selling expenses..................................... 329 606 808 1,044 1,822
General and administrative expenses.................. 1,972 1,889 2,451 4,143 6,372
----- ----- ------ ------ ------
Total operating expenses............................... 6,336 8,127 11,370 17,746 25,691
----- ----- ------ ------ ------
Income from operations................................. 393 1,334 2,173 3,278 4,916
Interest income (expense), net......................... (8) 5 (85) (33) 354
----- ----- ------ ------ ------
Income before income taxes and
cumulative effect of accounting change............... 385 1,339 2,088 3,245 5,270
Provision for income taxes............................. 163 495 880 1,395 2,266
----- ----- ------ ------ ------
Income before cumulative effect of
accounting change.................................... 222 844 1,208 1,850 3,004
Cumulative effect of accounting change................. -- 141 -- -- --
----- ----- ------ ------ ------
Net income............................................. $222 $703 $1,208 $1,850 $3,004
===== ===== ====== ====== ======
Net income per common share:
Income before cumulative effect of
accounting change.................................. $.08 $.17 $.31 $.38
Cumulative effect of accounting change............... (.01) -- -- --
------ ------ ------ ------
Net income per common share:
Primary...................................... (1) $ .07 $ .17 $ .31 $.38
------ ------ ------ ------
Fully diluted................................ (1) $ .07 $ .17 $ .31 $.37
------ ------ ------ ------
Shares used in computing net income per common share:..
Primary...................................... (1) 10,053 7,145 6,002 7,958
====== ====== ====== ======
Fully diluted................................ (1) 10,053 7,145 6,002 8,051
====== ====== ====== ======
========================================================================
As of December 31,
Dollars in Thousands
Balance Sheet Data: 1992 1993 1994 1995 1996
------ ------- ------- ------- -------
Cash, cash equivalents and short-term investments...... $ 138 $ 626 $ 757 $2,479 $11,267
Working capital........................................ 523 991 1,393 3,327 14,728
Total assets........................................... 1,882 2,814 4,205 7,586 20,844
Long-term debt......................................... 135 5 2,088 -- --
Total stockholders' equity............................. 691 1,401 291 4,846 17,760
</TABLE>
(1) This data has not been furnished for 1992 because such data would not be
meaningful.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
REVENUES
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Report.
General
Since the Company began operations in late 1988, it has experienced substantial
growth in revenues, income from operations and net income. During 1994, 1995 and
1996, the Company's revenues increased by 43.1%, 55.2% and 45.6%, respectively,
to $13.5 million in 1994, $21.0 million in 1995 and $30.6 million in 1996. The
Company's income from operations increased by 62.9%, 50.9% and 50.0%,
respectively, to $2.2 million in 1994, $3.3 million in 1995 and $4.9 million in
1996. The Company's net income increased by 71.8%, 53.1% and 62.4%,
respectively, to $1.2 million in 1994, $1.9 million in 1995 and $3.0 million in
1996.
Substantially all of the Company's revenues are professional fees which
generally are billed at an hourly rate. The Company's costs consist primarily of
employee-related costs and non-reimbursed travel expenses of its technical and
technical management employees. As employee related costs are relatively fixed,
variations in the Company's revenues and operating results can occur as a result
of variations in billing margins and utilization rates (i.e. the ratio of hours
billed to total available hours) of its technical employees.
Since most of the Company's consulting engagements are on a time and materials
basis, the Company historically has been able to maintain its billing margins by
increasing its hourly rates to offset increases in costs related to its
professional staff. The Company manages its billing margins by establishing a
target billing rate for each of its technical employees which is used as a goal
for the Company's account executives in negotiating and establishing billing
rates for specific projects or assignments; however, actual billing rates may be
higher or lower than the target billing rates. Hourly rate increases are
generally implemented by the Company when a technical employee completes one
assignment and moves to the next assignment, although hourly rates are also
often adjusted during an assignment based on relevant contractual provisions.
The Company further manages its billing margins by basing a portion of all
account executives' incentive compensation on the annual aggregate billing
margin for their accounts.
To date, the Company believes that it has effectively managed its personnel
utilization rates. Differences in personnel utilization rates can result from
variations in the amount of non-billed time, which has historically consisted of
training time, vacation and holiday time, time lost to illness and inclement
weather and unassigned time. Non-billed time also includes time devoted to
other necessary and productive activities such as sales support and interviewing
prospective employees. Unassigned time results from differences in the timing of
the completion of an existing assignment and the beginning of a new assignment.
In order to reduce and limit unassigned time, the Company actively manages
personnel utilization by monitoring and projecting estimated engagement start
and completion dates and matching employee availability with current and
projected client requirements. In addition, the number of new technical employee
training programs and the amount of training incurred for existing technical
employees varies and can affect the Company's personnel utilization rates from
period to period.
During 1993, 1994 and 1995, the Company enjoyed a lower employee turnover rate
than that experienced by the industry in general. Although industry statistics
are not yet available for 1996, the Company believes this trend will continue
for 1996 as well. The Company believes the continuity associated with its lower
employee turnover rate has helped it to respond more effectively to its clients'
needs as its business has grown. In addition, although the Company's growth has
resulted in increases in general and administrative expenses, such increases
would likely have been greater if the Company's employee turnover rate were
significantly higher.
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Results of Operations
The following table sets forth for the periods indicated selected statements of
operations data as a percentage of revenues:
<TABLE>
<CAPTION>
========================================
Years Ended December 31,
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Revenues......................................................... 100.0% 100.0% 100.0%
Operating expenses:
Direct costs................................................... 59.9 59.7 57.1
Selling expenses............................................... 6.0 5.0 6.0
General and administrative expenses............................ 18.1 19.7 20.8
----- ----- -----
Total operating expenses......................................... 84.0 84.4 83.9
----- ----- -----
Income from operations........................................... 16.0 15.6 16.1
Interest income (expense), net................................... (.6) (.2) 1.1
------ ------ -----
Income before income taxes....................................... 15.4 15.4 17.2
Provision for income taxes....................................... 6.5 6.6 7.4
----- ----- -----
Net income....................................................... 8.9% 8.8% 9.8%
===== ===== =====
</TABLE>
1996 Compared to 1995
Revenues. The Company's revenues for 1996 increased by $9.6 million, or 45.6%
from 1995. Approximately 64% of this increase resulted from an increase in the
volume of hours billed and approximately 36% from increases in the aggregate
average rates for hours billed during 1996. For 1996, revenue from clients in
the pharmaceutical industry increased to $18.0 million, or 58.8% of revenues,
from $13.5 million, or 64.3% of revenues, in 1995 and revenues from clients
engaged in software development increased to $3.5 million, or 11.4% of revenues,
in 1996 from $1.4 million, or 6.7% of revenues, in 1995.
Direct costs. Direct costs consist primarily of employee-related costs and
non-reimbursed travel expenses for the Company's technical employees.
Direct costs for 1996 increased by $4.9 million, or 39.3%, from 1995. This
increase is principally due to an increase in the number of technical employees
to 330 at December 31, 1996 from 254 at December 31, 1995.
As a percentage of revenues, direct costs declined to 57.1% in 1996 from 59.7%
in 1995. The decline resulted primarily from increases in aggregate average
billing rates during 1996 that exceeded increases in payroll and related
expenses for the Company's technical employees. In response to such billing rate
increases and to competition for information services professionals in general,
during the second quarter of 1996 the Company increased the compensation levels
for a number of its technical professionals. The Company expects that such
competitive pressures on technical employee compensation will continue at least
through 1997.
Selling expenses. Selling expenses principally consist of employee-related costs
as well as travel expenses of the Company's sales and marketing personnel.
Selling expenses for 1996 increased by $778,000 to $1.8 million from $1.0
million in 1995. This increase is principally due to the increase in the number
of sales and marketing personnel to 13 at December 31, 1996 from 8 at December
31, 1995.
11
<PAGE>
As a percentage of revenues, selling expenses increased to 6.0% for 1996
compared to 5.0% for 1995. This increase resulted from the addition of three
account executives (one in the Company's new Chicago sales office) and the
addition of two technical sales support personnel to assist in the increased
focus on project-oriented consulting.
General and administrative expenses. General and administrative expenses consist
of executive management costs, recruiting costs, accounting, human resources,
general expenses, office facilities costs, training and education expenses and
depreciation and amortization.
General and administrative expenses for 1996 increased by $2.3 million to $6.4
million from $4.1 million in 1995 and to 20.8% of revenues for 1996 compared to
19.7% for 1995. These increases are principally due to increases in facilities
costs (office rent and utilities) and facility-related costs (such as
depreciation of computer equipment, amortization of software and leasehold
improvements, expansion of computer networks, additional software costs and the
costs of related support personnel) to support an increase during 1996 in the
number of professional and supervisory personnel performing client engagements
in the Company's offices rather than at client locations. During 1996, the
Company also incurred certain new expenses and increased insurance, legal and
accounting expenses associated with public company filing and compliance
requirements and with investor and shareholder relations.
Interest Income. Net interest income was $354,000 in 1996 as compared with net
interest expense of $33,000 in 1995. This increase in net interest income
resulted from higher invested cash balance during 1996 principally as a result
of the $9.9 million in net proceeds received from the Company's initial public
offering of common stock in May 1996 (the "Initial Public Offering"). See
"Liquidity and Capital Resources".
Effective Income Tax Rate. The Company's effective income tax rate in 1995 and
1996 was 43.0%.
1995 Compared to 1994
Revenues. The Company's revenues increased 55.2% to $21.0 million in 1995 from
$13.5 million in 1994. The increase in the Company's revenues reflects an
increase in the volume of services delivered to new clients, as well as the
leveraging of the Company's existing client base by undertaking additional
projects for these clients, particularly from clients in the pharmaceutical
industry. The Company's revenues from clients in the pharmaceutical industry
increased by 62.7% to $13.5 million in 1995 from $8.3 million in 1994. In
addition, the Company's revenues from clients in the chemical industry increased
by approximately 74.4% to $3.0 million in 1995 from $1.7 million in 1994.
Direct costs. Direct costs declined as a percentage of revenues to 59.7% from
59.9% in 1994. In the aggregate, direct costs increased by 54.8% from 1994, due
to the increase in the number of technical employees required to support the
increased demand for the Company's services. In response to demand for the
Company's services, the Company increased the number of its technical employees
by 46.8% to 254 technical personnel at December 31, 1995 from 173 at December
31, 1994.
Selling expenses. Selling expenses declined as a percentage of revenues to 5.0%
in 1995 from 6.0% in 1994 due to the operating leverage resulting from a 55.2%
increase in revenues compared to an increase in selling expenses of only 29.2%.
General and administrative expenses. General and administrative expenses
increased as a percentage of revenues to 19.7% in 1995 from 18.1% in 1994. This
increase is primarily attributable to increased recruiting and depreciation
expenses. In 1995, recruiting expenses increased by approximately $417,000 from
1994, due to the Company's increased hiring of technical employees and an
approximate 43.0% increase in the average cost of recruiting each new employee.
The increase in the average cost of recruiting new employees was a reflection of
the competition for employees within the information technology industry and the
increased level of hiring necessary to meet the increased demand for the
Company's services. In 1995, depreciation expense increased by approximately
$156,000
12
<PAGE>
due to the Company's increased purchases of computer equipment and furniture to
support an increase in the number of technical employees performing client
engagements at the Company's offices.
Effective Income Tax Rate. The Company's effective income tax rate in 1994 and
1995 was 42.1% and 43.0%, respectively.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased $8.8 million to
$11.3 million at December 31, 1996 from $2.5 million at December 31, 1995. The
increase resulted primarily from the Initial Public Offering proceeds described
below and working capital provided by operations offset by capital expenditures.
Capital spending during 1996 increased to $2.2 million from $1.2 million in 1995
principally from purchases of computer and office equipment, software and
leasehold improvements to support an increase in the number of technical
employees performing client engagements on the Company's premises rather than at
client locations.
At December 31, 1996, cash equivalents and short-term investments were invested
in short-term U. S. Governmental securities, commercial paper, and institutional
money-market funds. By policy, the Company invests in high credit- quality
instruments.
In May 1996, the Company completed its Initial Public Offering. The Company
issued 2,175,000 shares of the Company's common stock and received net proceeds
of approximately $9.9 million.
In 1995, the Company sold 953,355 shares of Common Stock and received net
proceeds of approximately $2.7 million from such sale. The net proceeds
primarily were used by the Company to repay the outstanding bank indebtedness
and the note to the selling stockholder and the balance for general corporate
purposes. See Note 8 to the Consolidated Financial Statements appearing
elsewhere in this Report.
In May 1994, the Company repurchased, for approximately $2.1 million, all of the
shares of Common Stock held by a former stockholder. The Company paid $775,000
of this amount in cash with the balance financed by a seller note. To finance
its cash payment, the Company borrowed $750,000 from a commercial bank.
The Company currently anticipates that cash generated from operations and
existing cash balances will be sufficient to satisfy its operating requirements
and ordinary capital spending for the foreseeable future. The Company may expand
its capabilities through the acquisition of other businesses that are
complementary to the Company's business. Should the Company's business expand
more rapidly than expected, the Company's $1.0 million bank line of credit would
be available to fund such operating and capital requirements. In addition, the
Company could consider seeking additional public or private debt or equity
financing to fund growth opportunities, including acquisitions.
13
<PAGE>
Quarterly Financial Results
Set forth below are selected unaudited statements of operations data for the
last eight fiscal quarters of the Company. In management's opinion, the results
below have been prepared on the same basis as the audited financial statements
contained herein and include all material adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the information for
the periods presented when read in conjunction with the audited financial
statements and notes thereto contained elsewhere in this Report.
<TABLE>
<CAPTION>
Unaudited Quarterly Statements of Operations
===================================================================================================
1995 Quarter Ended 1996 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands, except per
share data
Revenues.................... $4,670 $4,959 $5,470 $5,925 $7,065 $7,444 $7,538 $8,560
Income before income
taxes..................... 686 766 976 817 1,484 1,270 1,200 1,316
Net income.................. 391 437 556 466 846 724 683 751
Net income per common share:
Primary................. $.07 $.07 $.09 $.07 $.13 $.10 $.08 $.08
Fully diluted........... $.07 $.07 $.09 $.07 $.13 $.10 $.08 $.08
Shares used in computing net
income per common share:
Primary................. 5,734 5,844 6,156 6,273 6,274 7,584 9,000 8,974
Fully diluted........... 5,734 5,844 6,156 6,273 6,274 7,589 9,041 8,974
</TABLE>
The Company believes that its business is generally not seasonal; however,
fluctuations in personnel utilization rates and the timing of additional general
and administrative expenses may cause profitability to fluctuate from one
quarter to another. Quarterly results may also vary due to the timing of new
hires, the timing of training for new and existing technical employees and the
number of business days in a particular quarter. Results of operations for any
previous fiscal quarter are not necessarily indicative of results for any future
periods, and future quarterly results could be adversely impacted by these, and
other factors.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements
The Company's annual financial statements are included in Item 14(c)(1) of this
Report, beginning on page 19.
15
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission not later than
120 days after December 31, 1996 (the "1997 Proxy").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1997 Proxy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1997 Proxy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1997 Proxy.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(a) (1) The following financial statements are filed as part of this Annual Report
on Form 10-K:
Consolidated Balance Sheets at December 31, 1995 and December 31, 1996 19
Consolidated Statements of Operations for the three years ended December 31, 1994,
1995 and 1996 20
Consolidated Statements of Stockholders' Equity for the three years ended December 31,
1994, 1995 and 1996 21
Consolidated Statements of Cash Flows for the three years ended December 31, 1994,
1995 and 1996 22
Notes to Consolidated Financial Statements 23
Report of KPMG Peat Marwick LLP, Independent Auditors 30
(2) The following financial statements schedule for the
years ended December 31, 1995 and 1996 read in
conjunction with the financial statements of
Integrated Systems Consulting Group, Inc. is filed as
part of this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves 31
Schedules other than that listed above have been
omitted since they are either not required, not
applicable, or because the information required is
included in the financial statements or the notes
thereto.
(3) The exhibits listed in the Exhibit Index on page 34 hereof are
attached hereto or incorporated herein by reference and filed as a part of this report.
(b) Reports on Form 8-K
None.
</TABLE>
18
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
=======================
December 31,
1995 1996
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......................................... $2,479 $ 8,730
Short-term investments, at cost, which approximates market ......... -- 2,537
Accounts receivable:
Trade, net of reserves of $200 and $196 ....................... 3,139 5,643
Unbilled ...................................................... 133 144
Prepaid expenses ................................................... 204 562
Other current assets ............................................... 112 196
--------- ---------
Total current assets .................................................... 6,067 17,812
Property and equipment, net ............................................. 1,412 2,935
Other assets ............................................................ 107 97
--------- ---------
$7,586 $20,844
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .............................. $ 994 $ 1,590
Accrued compensation payable ....................................... 746 1,104
Income taxes payable ............................................... 400 27
Deferred income taxes .............................................. 600 363
--------- ---------
Total current liabilities ............................................... 2,740 3,084
--------- ---------
Commitments (note 10)
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized; none
issued ........................................................... -- --
Common stock, $.005 par value, 25,000,000 shares authorized,
7,017,541 and 9,227,513 shares issued in 1995 and 1996,
respectively ..................................................... 35 46
Additional paid-in capital ......................................... 2,711 12,612
Retained earnings .................................................. 2,772 5,776
--------- ---------
5,518 18,434
Treasury stock, at cost, 1,411,860 and 1,370,840 common shares in
1995 and 1996, respectively ...................................... (672) (674)
--------- ---------
4,846 17,760
--------- ---------
$7,586 $20,844
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------
<TABLE>
<CAPTION>
===================================
Years ended December 31,
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenues ........................................... $13,543 $21,024 $30,607
Operating expenses:
Direct costs .................................. 8,111 12,559 17,497
Selling expenses .............................. 808 1,044 1,822
General and administrative expenses ........... 2,451 4,143 6,372
---------- --------- ---------
Total operating expenses ........................... 11,370 17,746 25,691
---------- --------- ---------
Income from operations ............................. 2,173 3,278 4,916
---------- --------- ---------
Interest income .................................... 24 80 359
Interest expense ................................... (109) (113) (5)
---------- --------- ---------
Income before income taxes ......................... 2,088 3,245 5,270
Provision for income taxes ......................... 880 1,395 2,266
---------- --------- ---------
Net income ......................................... $ 1,208 $ 1,850 $ 3,004
========== ========= =========
Net income per common share:
Primary ....................................... $ .17 $ .31 $ .38
========== ========= =========
Fully diluted ................................. $ .17 $ .31 $ .37
========== ========= =========
Shares used in computing net income per common
share:
Primary ....................................... 7,145 6,002 7,958
========== ========= =========
Fully diluted ................................. 7,145 6,002 8,051
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Consolidated Statements of Stockholders Equity
(in thousands, except number of shares)
Years ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------------- Paid-in Retained ------------------------
Shares Amount Capital Earnings Shares Amount Total
------------- -------- ------------ ---------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 .......... 9,104,161 $ 45 $ 8 $ 1,348 -- $ -- $ 1,401
Distribution to stockholders ....... -- -- -- (192) -- -- (192)
Stock redemption transaction ....... (3,103,020) (15) (8) (1,442) (1,396,980) (660) (2,125)
Purchase of treasury stock, at cost -- -- -- -- (9,900) (4) (4)
Exercise of stock options .......... 14,610 -- 3 -- -- -- 3
Net income ......................... -- -- -- 1,208 -- -- 1,208
------------- -------- ------------ ---------- ------------- --------- -------
Balances, December 31, 1994 ........ 6,015,751 30 3 922 (1,406,880) (664) 291
Purchase of treasury stock, at cost -- -- -- -- (4,980) (8) (8)
Exercise of stock options .......... 48,435 -- 15 -- -- -- 15
Issuance of common stock and
warrants .......................... 953,355 5 2,693 -- -- -- 2,698
Net income ......................... -- -- -- 1,850 -- -- 1,850
------------- -------- ------------ ---------- ------------- --------- -------
Balances, December 31, 1995 ........ 7,017,541 35 2,711 2,772 (1,411,860) (672) 4,846
Purchase of treasury stock, at cost -- -- -- -- (7,800) (26) (26)
Exercise of stock options .......... 34,972 -- 43 -- 48,820 24 67
Issuance of common stock ........... 2,175,000 11 9,858 -- -- -- 9,869
Net income ......................... -- -- -- 3,004 -- -- 3,004
------------- -------- ------------ ---------- ------------- --------- -------
Balances, December 31, 1996 ........ 9,227,513 $ 46 $12,612 $ 5,776 (1,370,840) $(674) $17,760
============= ======== ============ ========== ============= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
===================================
Years Ended December 31,
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................... $ 1,208 $ 1,850 $ 3,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............. 156 312 725
Deferred income tax benefit ............... 301 (297) (237)
Changes in assets and liabilities:
Accounts receivable .................. (1,094) (708) (2,609)
Prepaid expenses ..................... (23) (23) (358)
Other assets ......................... (31) 3 20
Accounts payable and accrued expenses 187 496 596
Accrued compensation payable ......... 231 500 358
Deferred revenue ..................... (159) -- --
Income taxes payable ................. (126) 179 (373)
--------- --------- ----------
Net cash provided by operating activities ........... 650 2,312 1,126
--------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment ............ (228) (1,243) (2,248)
Purchase of short-term investments ............. -- -- (15,942)
Maturity and sale of short-term investments .... -- -- 13,405
--------- --------- ----------
Net cash used in investing activities ............... (228) (1,243) (4,785)
--------- --------- ----------
Cash flows from financing activities:
Repayment of note payable to stockholder ....... (25) (1,350) --
Proceeds from bank debt ........................ 1,500 -- --
Repayments on bank debt ........................ (797) (703) --
Purchase of treasury stock, net ................ (780) (8) (2)
Proceeds from issuance of common stock ......... 3 2,714 9,912
Distribution to shareholders ................... (192) -- --
--------- --------- ----------
Net cash (used in) provided by financing activities . (291) 653 9,910
--------- --------- ----------
Net increase in cash and cash equivalents ........... 131 1,722 6,251
Cash and cash equivalents, beginning of year ........ 626 757 2,479
--------- --------- ----------
Cash and cash equivalents, end of year .............. $ 757 $ 2,479 $ 8,730
========= ========= ==========
Supplemental disclosure of cash flow information:
Interest paid .................................. $ 109 $ 118 $ 5
Income taxes paid .............................. $ 704 $ 1,514 $ 2,879
Noncash investing and financing transactions:
Equipment acquired under capital lease ......... $ 36 $ -- $ --
Issuance of debt to acquire treasury stock ..... $ 1,350 $ -- $ --
Conversion of accounts receivable to note
receivable ................................... $ -- $ 100 $ 94
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements
DECEMBER 31, 1996
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Integrated Systems Consulting Group, Inc. (ISCG or the Company) through its
wholly-owned operating subsidiary provides consulting services that address its
clients' information processing needs, including client-server architecture,
graphical user interface applications, relational and object-oriented databases,
and cross platform applications integration. The Company operates in one
business segment delivering its services in two broad areas, software
applications development and systems and network management. The Company's
applications development activities accounted for approximately 78% and 79% of
its revenues in 1995 and 1996, respectively.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include U.S. Government securities, commercial paper,
and money market accounts with an original maturity of three months or less.
INVESTMENTS
The Company has classified its marketable debt securities as
held-to-maturity. Securities classified as held-to-maturity are reported at
amortized cost. Realized gains and losses and declines in value of securities
judged to be other-than-temporary are included in income. Interest and
dividends on all securities are included in interest income.
Since held-to-maturity securities are short-term in nature, changes in market
interest rates would not have a significant impact on fair value of these
securities. These securities are carried at amortized cost which approximate
fair value.
Investments with maturities between three and twelve months are considered
short-term investments. Short-term investments consists of commercial paper
and United States Government debt securities.
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable approximate
fair value due to the short maturities of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of depreciation. Expenditures
for improvements which significantly extend the useful life of an asset are
capitalized. Expenditures for repairs and maintenance are expensed as
incurred. Property and equipment acquired under capital leases are stated at
the lower of fair market value or the present value of the minimum lease
payments at the inception of the lease. Depreciation and amortization is
provided using the straight-line method over the estimated useful lives of
the assets as follows:
Computers and software (commercially available packages) 3 years
Furniture, fixtures and equipment 3 to 8 years
Leasehold improvements are amortized over the shorter of their estimated
useful lives or the related lease term.
REVENUE RECOGNITION
Revenues under time and material contracts are recognized in the period in
which services are provided.
Revenues under fixed price contracts are recognized under the
percentage-of-completion method. Under this method, revenues are recognized
based upon costs incurred as a percentage of estimated total costs of
individual contracts. Anticipated losses are recognized when they become
known. Revisions in estimated profits are made in the month in which the
circumstances requiring the revision become known.
23
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements - (Continued)
(2) Summary of Significant Accounting Policies - (Continued)
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109)
which requires the use of the asset and liability approach for financial
accounting and reporting of deferred income taxes.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform to the 1996 presentation.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares
of common and common equivalent shares (stock options and warrants)
outstanding less the number of treasury shares assumed to be purchased from
the proceeds using the average market price of the Company's common stock
during the quarters and year for primary and fully diluted net income per
common share, respectively. As required by a Staff Accounting Bulletin issued
by the Securities and Exchange Commission, common and common equivalent
shares issued by the Company during the twelve-month period preceding the
initial public offering ("IPO"), discussed in Note 8, have been included in
the calculation as if they were outstanding for all periods prior to the IPO
(using the treasury stock method and assuming an IPO price of $5.00 per
share).
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Estimates made in the
preparation of the accompanying financial statements include the percentage
of completion of fixed price contracts and the amount of reserves established
for uncollectible amounts included in accounts receivable.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
(SFAS 121) was adopted by the Company in January 1996. SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company's adoption of SFAS 121 did not have a material
impact on its results of operations or financial position.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) was adopted by the Company in January
1996 and the Company elected to continue to use the intrinsic value method
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, (APB 25) with pro forma disclosures of net income and net
income per share as if the fair value method had been applied, discussed in
Note 9.
(3) CONCENTRATION OF CREDIT RISK AND MAJOR CLIENTS
The Company derives a significant portion of its revenues from companies
in the pharmaceutical industry. In particular, the Company's revenues are
highly dependent on research and development expenditures by the
pharmaceutical industry. Further, the Company's business could be impacted by
changes in government regulations applicable to the drug development process.
Revenues derived from clients in the pharmaceutical industry were
approximately 61%, 64% and 59% of total revenues in the years ending December
31, 1994, 1995, and 1996, respectively. At December 31, 1996, $3,120,000 or
52% of trade and unbilled receivables are due from companies in the
pharmaceutical industry.
The following table summarizes the percentage of revenues from the
Company's significant clients (listing those clients that exceed 10% in the
applicable year):
======================================================
Year Ended December 31,
Client 1994 1995 1996
---------- -------- -------- --------
A ........ * 13% 10%
B ........ 17% 11% *
* Less than 10%
24
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements - (Continued)
(3) Concentration of Credit Risk and Major Clients - (Continued)
The Company generally extends 30-day credit terms to, and requires no
collateral from, its clients. The Company performs an initial credit
evaluation and, on an ongoing basis, monitors the payment patterns and
balances of its clients' accounts. The Company maintains an allowance for
uncollectible amounts based on past experience.
There were no significant revenues derived from foreign operations during the
periods covered by the accompanying financial statements.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
=========================
December 31,
1995 1996
--------- ---------
(in thousands)
Software (commercially available packages) ..... $ 191 $ 450
Computers and office equipment ................. 1,425 2,542
Leasehold improvements ......................... 38 378
Furniture and fixtures ......................... 479 995
--------- ---------
2,133 4,365
Less: Accumulated depreciation and amortization (721) (1,430)
--------- ---------
$1,412 $ 2,935
========= =========
(5) LINE OF CREDIT
The Company maintains a bank line of credit which provides for maximum
borrowings of $1,000,000, with interest on outstanding borrowings at the bank's
national commercial rate, which was 8.25% at December 31, 1996. The agreement
requires the Company to maintain a compensating balance of $50,000, meet certain
financial covenants, prohibits the payment of dividends, and matures in June
1997 if not extended. The highest borrowings outstanding under this line were
$0, $375,000, and $200,000 during 1994, 1995, and 1996, respectively. There were
no amounts outstanding at December 31, 1996.
(6) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's net deferred tax liabilities are as follows:
=======================
December 31,
1995 1996
------- -------
(in thousands)
Modified cash vs. accrual method of accounting $659 $491
Allowance for doubtful accounts ............... (81) (79)
Other ......................................... 22 (49)
------- -------
Net deferred tax liabilities .................. $600 $363
======= =======
Significant components of the provision for income taxes are as follows:
====================================================
Year Ended December 31,
1994 1995 1996
------- --------- ---------
(in thousands)
Current:
Federal . $422 $1,298 $1,954
State ... 157 394 549
------- --------- ---------
579 1,692 2,503
------- --------- ---------
Deferred:
Federal . 210 (192) (169)
State ... 91 (105) (68)
------- --------- ---------
301 (297) (237)
------- --------- ---------
$880 $1,395 $2,266
======= ========= =========
25
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements - (Continued)
(6) Income Taxes - (Continued)
The following is a reconciliation of the federal income tax computed at the
statutory rates to the actual income tax. The Federal statutory rate for the
year 1994 was 35% as compared to 34% for 1995 and 1996. The difference in
rates is due to the Company being classified as a Personal Service
Corporation for 1994.
<TABLE>
<CAPTION>
================================
Year Ended December 31,
1994 1995 1996
------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate ........ $731 $1,103 $1,792
State income taxes, net of federal tax benefit.. 102 260 317
Income of affiliate not subject to income tax .. (21) -- --
Other ......................................... 68 32 157
------- --------- ---------
$880 $1,395 $2,266
======= ========= =========
</TABLE>
(7) EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all employees. The Company's
contribution was $59,000, $86,000 and $203,000 for 1994, 1995, and 1996,
respectively.
(8) STOCKHOLDERS' EQUITY
CAPITAL STRUCTURE
Prior to June 1995, the Company had two classes of common stock (A and B)
which were similar in all respects except that class A common shares had
voting rights and class B common shares did not. Effective June 30, 1995, the
Company's articles of incorporation were amended to combine the class A and
class B shares into a single class of voting common stock. This combination
of the separate classes of common stock has been given retroactive effect in
the accompanying financial statements and related note disclosures for all
periods presented.
STOCK REDEMPTION TRANSACTION
In May 1994, the Company purchased, for $2,125,000, all of the shares of its
common stock held by a principal stockholder. The Company paid $775,000 in
cash, and financed the balance with a note to the seller for $1,350,000 which
was repaid in 1995. Concurrent with the purchase, the Company borrowed
$750,000 from a bank which was repaid in 1995. The transaction was accounted
for as a redemption and cancellation of the majority of the reacquired
shares, excluding 1,396,980 shares which were accounted for as treasury
shares, and resulted in the elimination of available additional paid-in
capital as of the transaction date of $8,000 and a charge to retained
earnings of $1,442,000.
STOCK SPLITS
On October 13, 1994, the Board of Directors declared a one-for-one stock
dividend which has been accounted for as a stock split. On November 16, 1995,
the Board of Directors authorized a three-for-two stock split. All share and
per share information included in the accompanying financial statements and
notes has been adjusted to give retroactive effect to these stock splits.
OTHER TRANSACTIONS
On May 31, 1996, the Company completed its IPO. The Company issued 2,175,000
shares of the Company's common stock and received proceeds of approximately
$9,900,000, net of issuance costs of approximately $975,000.
In June and August 1995, Safeguard Scientifics, Inc. (Safeguard) and two
venture capital funds (collectively, the Investors) acquired 2,080,048 shares
of the Company's common stock from the Company and its principal shareholder
and also acquired warrants to purchase 339,862 shares of common stock at an
exercise price of $3.68 per share. The Company sold 953,355 common shares and
the warrants directly to the investors for cash of $2,750,000. The balance of
the Investors' shares were acquired from the Company's principal stockholder.
In connection with these transactions, the Company also
26
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements - (Continued)
(8) Stockholders' Equity - (Continued)
issued warrants to acquire 339,861 shares of its common stock at an exercise
price of $3.68 per share to the principal stockholder, who is also the
Company's chief executive officer. No value was assigned to these warrants
since their exercise price exceeded the estimated fair value of the Company's
common stock as of the issuance date.
The warrants discussed in the preceding paragraph became exercisable on the
effective date of the registration statement on Form S-1 with respect to the
IPO . The warrants issued to the Investors expire three years after they
become exercisable and the warrants issued to the principal stockholder
expire June 30, 1999. The warrants contain customary provisions requiring
proportionate adjustment of the exercise price in the event of a stock split,
stock dividend, or dilutive financing. The Investors also obtained certain
other rights which include piggyback and demand registration rights in
certain circumstances following an IPO of the Company's common stock.
(9) STOCK OPTION PLAN
The Company has a stock option plan (the Plan) under which all employees and
members of the Board of Directors are eligible to participate. A total of
1,250,000 shares of common stock have been reserved for this purpose.
Under the terms of the Plan, authorized options are granted at estimated fair
value. Options granted before July 25, 1996 generally become exerciseable and
vest at the rate of 20% per annum beginning on the second anniversary of the
grant date. Options granted on or after July 25, 1996 become exerciseable and
vest at the rate of 20% per annum beginning on the first anniversary of the
grant date. All options expire 10 years from the grant date.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for the Plan. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's Plan been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1995 1996
--------- ---------
Net Income ..................... As Reported $1,850 $3,004
Pro forma $1,811 $2,918
Primary earnings per share ..... As Reported $ .31 $ .38
Pro forma $ .30 $ .37
Fully diluted earnings per share As Reported $ .31 $ .37
Pro forma $ .30 $ .36
The per share weighted-average fair value of stock options granted during
1995 and 1996 was $.55 and $3.22 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1995 -
expected dividend yield 0%, risk-free interest rate of 5.55% to 7.18%, and an
expected life of seven years; 1996 - expected dividend yield 0%, risk-free
interest rate of 6.67%, and an expected life of six years.
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to January 1,
1995 is not considered.
27
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements - (Continued)
(9) Stock Option Plan - (Continued)
Option activity under the Plan is summarized below:
Average Range/
Shares Weighted -
Shares Under Average of
Available Option Exercise Prices
----------- ---------- ---------------
Balances, January 1, 1994 .. 576,675 307,725 $ .05 to .72
Granted .................... (58,598) 58,598 1.22
Exercised .................. -- (14,610) .05 to .63
Canceled ................... 25,633 (25,633) .05 to 1.22
----------- ---------- ---------------
Balances, December 31, 1994 543,710 326,080 .59
Additional authorization ... 320,000 -- --
Granted .................... (556,551) 556,551 2.49
Exercised .................. -- (48,435) .32
Canceled ................... 23,140 (23,140) 1.07
----------- ---------- ---------------
Balances, December 31, 1995 330,229 811,056 1.89
Granted .................... (13,760) 13,760 14.35
Exercised .................. -- (75,352) .81
Canceled ................... 39,218 (39,218) 2.51
Repurchases ................ 6,600 -- --
----------- ---------- ---------------
Balances, December 31, 1996 362,287 710,246 $ 2.33
=========== ========== ===============
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.05 - $15.25 and 7.67
years, respectively.
At December 31, 1995 and 1996, the number of options exercisable was 140,492
and 152,914 respectively, and the weighted-average exercise price of those
options was $1.11 and $1.27, respectively.
(10) COMMITMENTS
LEASES
The Company is obligated under a capital lease for certain equipment with
$13,000 of future payments through December 1997. Equipment acquired through
capital leases in December 1994 are included in fixed assets at a cost of
$36,000 and accumulated amortization of $10,000 at December 31, 1996. The
Company is obligated to pay rent for office space under operating leases
which expire at various dates through September 2000.
Rent expense for 1994, 1995, and 1996 was $200,000, $293,000, and $614,000
respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1996 are as follows
(in thousands):
1997 .................. $ 817
1998 .................. 824
1999 .................. 815
2000 .................. 673
--------
Total minimum lease payments $3,129
========
28
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to consolidated financial statements - (Continued)
(10) Commitments - (Continued)
SALARY CONTINUATION AGREEMENTS
The Company has employment agreements with certain members of management.
These agreements contain provisions for salary continuation payments
(aggregating approximately $600,000 at December 31, 1996) if all such
employees are terminated without cause.
(11) RELATED PARTY TRANSACTIONS
A former member of the Company's Board of Directors is the chief executive
officer of a client. Revenues from this client were $52,000, $587,000, and
$2,858,000 in 1994, 1995 and 1996, respectively. Outstanding trade accounts
receivable from this client were $150,000 and $572,000 at December 31, 1995 and
1996, respectively. Additionally, on September 30, 1995, the Company converted
$100,000 of accounts receivable from this client into a note receivable. The
$50,000 balance of the unsecured note is payable on September 30, 1997, and
bears interest at 7% per annum, which is payable quarterly.
The same former member of the Company's Board of Directors is also a member of a
client's Board of Directors. This client is also a consolidated subsidiary of
Safeguard. Revenues from this client were $1,241,000, $395,000, and $114,000 in
1994, 1995 and 1996, respectively. Outstanding accounts receivable from this
client were $49,000 and $0 at December 31, 1995 and 1996, respectively.
During the years ended December 31, 1994, 1995 and 1996, the Company made
insurance premium payments of $63,000, $116,000 and $143,000, respectively,
under certain insurance policies on the life of the Chief Executive Officer of
the Company for which the Company is not the beneficiary.
(12) SUBSEQUENT EVENTS
On January 23, 1997, the Company's Board of Directors authorized the filing of a
registration statement on Form S-1. The Board also authorized the reservation of
400,000 additional shares for the Stock Option Plan subject to shareholder
approval and authorized the granting of approximately 147,000 options to
employees.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Integrated Systems Consulting Group, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Systems Consulting Group, Inc. and subsidiaries as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Systems
Consulting Group, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 23, 1997
30
<PAGE>
SCHEDULE II
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
------------------- ------------ ---------------------------- ------------ -----------
Additions
----------------------------
For the year Balance at Charged to Charged to Balance
ended beginning cost and other at end of
December 31 Description of period expenses accounts Deductions period
-------------- ------------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
1994 Billing adjustments $100,000 $ -- $ -- $ -- $100,000
and uncollectible
amounts
1995 Billing adjustments 100,000 41,000 59,000 -- 200,000
and uncollectible
amounts
1996 Billing adjustments 200,000 -- 23,100(1) (27,179) 195,921
and uncollectible
amounts
</TABLE>
- ------
(1) Charged against revenue.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTEGRATED SYSTEMS CONSULTING
GROUP, INC.
By: /s/ DAVID S. LIPSON
-----------------------------
David S. Lipson
Chairman, Chief Executive Officer,
President & Treasurer
Date: February 17, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
- ---------- --------- ----
<S> <C> <C>
/s/ DAVID S. LIPSON Chief Executive Officer, President and February 17, 1997
- -------------------------------- Treasurer (Principal Executive Officer) and
David S. Lipson Chairman
/s/ DAVID D. GATHMAN Chief Operating Officer, Vice President, February 17, 1997
- -------------------------------- Secretary and Assistant Treasurer (Principal
David D. Gathman Financial and Accounting Officer) and
Director
/s/ FRANK BALDINO, Jr. Director January 27, 1997
- --------------------------------
Frank Baldino, Jr.
/s/ MELVYN E. BERGSTEIN Director February 17, 1997
- ----------------------------
Melvyn E. Bergstein
/s/ DONALD R. CALDWELL Director February 17, 1997
- ---------------------------
Donald R. Caldwell
/s/ MARK J. DENINO Director February 17, 1997
- ---------------------------------
Mark J. DeNino
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ DAVID FEHR Director February 17, 1997
- --------------------------------------
David Fehr
/s/ JAMES L. MANN Director January 27, 1997
- --------------------------------------
James L. Mann
/s/ DONNA J. PEDRICK Director February 17, 1997
- -------------------------------
Donna J. Pedrick
/s/ MICHAEL D. STERN Director January 28, 1997
- --------------------------------------
Michael D. Stern
/s/ EDWARD S.J. TOMEZSKO Director January 28, 1997
- --------------------------------------
Edward S.J. Tomezsko
</TABLE>
33
<PAGE>
INDEX TO EXHIBITS
Exhibits
- --------
3.1 Articles of Incorporation of the Company.*
3.2 By-laws of the Company.*
4 Specimen stock certificate.*
10.1 Stock Option Plan, as amended.
10.2 Amended and Restated Employment Agreement dated January 1, 1995 between the
Registrant and David S. Lipson.*
10.3 Employment Agreement dated April 1, 1994 between the Registrant and David
D. Gathman.*
10.4 Employment Agreement dated January 1, 1993 between the Registrant and
Edward P. Kaiserian, as modified on January 1, 1995.*
10.5 Employment Agreement dated January 9, 1992 between the Registrant and David
F. Elderkin.*
10.6 Employment Agreement dated November 25, 1995 between the Registrant and Jay
M. Rose.*
10.7 Common Stock and Warrant Purchase Agreement dated June 30, 1995 among the
Registrant, David S. Lipson, Safeguard Scientifics (Delaware), Inc.,
Technology Leaders II L.P. and Technology Leaders II Offshore C.V.*
11 Statement Regarding Computation of Earnings Per Share.**
21 Subsidiaries of the Registrant.*
23 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
* Filed as an exhibit to the Company's registration statement on Form S-1
(File No. 333-00790) and incorporated herein by reference.
** Filed as an exhibit to the Company's registration statement on Form S-1
(File No. 333-21009) and incorporated herein by reference.
34
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
AMENDED AND RESTATED 1989 INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan
The purposes of this plan are to foster and promote the long-term financial
success of the Company by (a) attracting and retaining key personnel of
outstanding ability by the granting of stock options; (b) strengthening the
Company's capacity to develop and maintain a competent management team; (c)
providing incentive compensation opportunities which are competitive with those
of other businesses; and (d) enabling key personnel to participate in the
financial success of the Company through the ownership of stock in the Company.
It is intended that stock options granted under this Plan shall be "incentive
stock options", as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). All requirements of Code Section 422 and the
regulations issued thereunder are deemed a part of this Plan and any provision
hereof which is contrary to those requirements shall be null and void.
2. Definitions
(a) "Board" means the Board of Directors of the Company.
(b) "Committee" means a Committee appointed by the Board to administer
the Plan. The Committee shall consist of not less than two persons who shall
serve at the pleasure of the Board.
(c) "Company" means Integrated Systems Consulting Group, Inc., a
Pennsylvania corporation, and its Subsidiaries, if any.
(d) "Employee" means any person (including any officer of the Company),
who is employed on a full-time basis by the Company, and any member of the Board
or the Board of Directors of any Subsidiary. For purposes of the Plan,
employment on a full-time basis means employment for 40 or more hours per week.
(e) "Exercise Period" means the period during which a Participant is
entitled to exercise a Stock Option granted to such Participant under the Plan;
which period shall neither begin prior to two (2) years, nor end later than ten
(10) years from the date of the grant of such Option. Options granted to any
Employee under this Plan shall continue to be exercisable only so long as the
Participant continues to be an Employee, except as provided in Section 7 hereof.
(f) "Fair Market Value" means the value of the Shares determined in
good faith by the Plan Administrator. If shares of the Stock are listed on a
stock exchange, such determination shall be made on the basis of the closing
sale price of such
<PAGE>
Shares on any stock exchange on which such shares are listed. If shares of the
Stock are not listed on a stock exchange, but are traded on the over-the-counter
market, such determination shall be made on the basis of the mean between the
bid and offer prices for such shares on the over-the-counter market. In no case
shall such Fair Market Value be less than the par value of such Shares. Fair
Market Value of the Shares shall be determined without regard to any
restrictions other than a restriction which, by its terms, will never lapse.
(g) "Offer" means a tender or exchange offer, other than one made by
the Company, for shares of Stock in the Company.
(h) "Participant" means any Employee who is selected by the Plan
Administrator to receive a Stock Option.
(i) "Plan" means the Amended and Restated 1989 Incentive Stock Option
Plan of the Company, including any amendments thereto.
(j) "Plan Administrator" means either the Board or a Board-appointed
Committee, whichever is designated from time to time to administer the Plan
under Section 3(a) hereof.
(k) "Reorganization Transaction" means a merger, consolidation or
combination of the Company with another corporation or entity or any similar
reorganization of the Company, the complete liquidation of the Company, or the
sale of all or substantially all of the assets of the Company.
(l) "Shares" means the shares of Stock reserved for issuance or
transfer by the Company under the Plan as set forth in Section 4(a) hereof. The
term "Shares" shall also include all shares of Stock received with respect to
Shares by a Participant pursuant to a stock dividend, stock split,
recapitalization or other similar transaction.
(m) "Stock" means the Common Stock, par value $.005 per share, of the
Company.
(n) "Stock Option" or "Option" means an option to purchase Shares
granted under Section 6 hereof.
(o) "Subsidiary" means any corporation the majority of the outstanding
voting stock of which is owned, directly or indirectly, by the Company.
(p) "Termination of Employment" means the time when the
employee-employer relationship between the Participant and the Company is
terminated for any reason, including, but not limited to, a termination by
resignation, discharge, death, disability, or retirement, but excluding such
termination where there is a simultaneous reemployment by either the Company or
a Subsidiary.
<PAGE>
(q) "Vesting Schedule" means the dates when a Participant can exercise
the Options granted under this Plan, as set forth in Section 6(c) hereof.
3. Administration of the Plan
(a) The Plan shall be administered under the direction of the Board.
The Board may at any time, in its sole discretion, appoint a Committee of the
Company which shall have all of the powers, duties, and responsibilities of the
Board of Directors under this Plan and shall be subject to all of the terms and
conditions of this Plan applicable to the Board of Directors. The Committee, if
appointed, shall consist of two or more persons who shall serve at the pleasure
of the Board of Directors. Such persons may or may not be Directors of the
Company. The Board shall determine, from time to time, whether the Plan shall be
administered by the Board or the Committee, and whichever body is so designated
shall be the Plan Administrator hereunder.
(b) Subject to the provisions of the Plan, the Plan Administrator shall
have exclusive power to select the Employees who are to be Participants under
the Plan as set forth in Section 5 hereof and to determine the Options to be
granted to the Participants selected and the time or times when, and terms,
conditions and restrictions subject to which, such Options will be granted.
(c) Decisions and determinations by the Plan Administrator shall be
final and binding upon all persons, including, but not limited to, the Company
and its shareholders, Participants and their personal representatives, heirs and
assigns, and other Employees. The Plan Administrator shall have the authority to
interpret the Plan, establish and revise rules and regulations relating to the
Plan, and make any other determinations that it believes necessary or advisable
for the administration of the Plan; provided, however, that no such rules,
regulations or determinations are inconsistent with the terms of this Plan.
(d) The provisions of the By-laws of the Company governing the number
of Directors of the Board required for action to be taken by the Board at a
meeting and the requirements for voting by Directors at a meeting at which a
quorum is present, or for acting by their written consent, shall be complied
with by the Board in order to take valid actions under the Plan. Notwithstanding
anything in the By-laws to the contrary, a majority of the Committee shall
constitute a quorum, and the acts of a majority of the members of the Committee
present at any meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee without a meeting, shall be the acts of the
Committee.
<PAGE>
(e) All expenses and liabilities incurred by the Plan Administrator in
the administration of the Plan shall be borne by the Company. The Plan
Administrator may employ attorneys, consultants, accountants, or other persons
to render services in connection with the Plan, and the Company, the Board, the
Committee, and the members of the Board and Committee shall be entitled to rely
upon the advice, opinions, or valuations of any such persons. Neither the
Company, the Board, the Committee, nor any member of the Board or Committee
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board and Committee shall be indemnified by the Company with respect to any such
liability to the fullest extent permitted by the By-laws of the Company.
4. Stock Subject to the Plan
(a) The maximum number of shares of Stock which may be issued or
transferred by the Company under the Plan and which shall be reserved for such
issuance shall be 1,250,000 Shares.
(b) The Board may reserve authorized but unissued shares of Stock, or
treasury shares of Stock, not otherwise reserved or restricted, for issuance
under this Plan. Shares reserved for issuance or transfer under outstanding
Stock Options under this Plan which expire unexercised or which are cancelled
shall again become reserved for issuance under this Plan.
(c) The approval of this Plan by the Board shall constitute the Board's
conclusive judgment and determination that, when Shares have been issued to a
Participant in accordance with the terms and conditions of the Plan, such Shares
shall be considered to be issued for full and adequate consideration and shall
be fully paid and nonassessable Stock, and that such consideration shall be
accounted for in accordance with the Company's standard accounting practice.
<PAGE>
5. Eligibility
The Plan Administrator shall from time to time, in its absolute discretion,
select Participants to whom Stock Options shall be granted from among those
Employees who are key personnel of the Company. No Stock options shall be
granted to any individual who, at the time the Stock Option is granted, owns
(after application of the ownership attribution rules contained in Code Section
424(d)) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, unless the purchase price
per Share under such Option is at least 110% of the Fair Market Value of such
Share on the date the Option is granted, and such Option is not exercisable
until after the expiration of five (5) years from the date on which such Option
is granted. Moreover, the aggregate fair market value (determined as of the time
the Option is granted) of the shares of stock of the Company with respect to
which incentive stock options (as defined in Code Section 422) are exercisable
for the first time by any Participant during any calendar year (pursuant to all
incentive stock option plans of the Company) shall not exceed $100,000.
6. Grant of Stock Option; Agreement
At the time an Option is granted pursuant to this Plan, each Participant granted
an Option shall enter into an agreement with the Company (an "Incentive Stock
Option Agreement"), in a form approved by the Plan Administrator, which shall
set forth the general terms and conditions of the Options granted to the
Participant, and such other terms and conditions as the Plan Administrator
shall, in its sole discretion, determine. A copy of a form of Incentive Stock
Option Agreement is attached hereto as Exhibit A. The Incentive Stock Option
Agreement shall specify the following terms and conditions with respect to the
Option:
(a) Number of Shares. The number of Shares issuable or transferable to
the Participant upon the exercise of the Option.
(b) Price. The purchase price per Share deliverable upon the exercise
of the Option, which shall not be less than the Fair Market Value of the Shares
on the date the Option is granted. The purchase price may be paid in cash, by
check or in any other form as may be deemed acceptable by the Plan
Administrator.
(c) Exercise Period and Vesting Schedule. The Stock Options granted
under this Plan shall be exercisable by the Participant in accordance with the
following schedule (the "Vesting Schedule"):
For Options granted before July 25th, 1996:
2 years from date of grant: 20% of Shares
3 years from date of grant: 40% of Shares
4 years from date of grant: 60% of Shares
5 years from date of grant: 80% of Shares
6 years from date of grant: 100% of Shares
<PAGE>
For Options granted on or after July 25th, 1996:
1 year from date of grant: 20% of Shares
2 years from date of grant: 40% of Shares
3 years from date of grant: 60% of Shares
4 years from date of grant: 80% of Shares
5 years from date of grant: 100% of Shares
(d) Discretion of Plan Administrator. Notwithstanding anything to the
contrary in this Section 6(d), the Plan Administrator, at any time and in its
sole discretion, may establish the Vesting Schedule for any Stock Options
granted under this Plan and may also provide for the acceleration of the Vesting
Schedule with respect to Stock Options previously granted under the Plan to any
Participant and the acceleration of the right to exercise Stock Options prior to
vesting (provided such Stock is subject to the Company's right, but not the
obligation, to repurchase such Stock if vesting does not subsequently occur),
provided that such grant or acceleration shall not impair the qualification of
such Stock Option under Code Section 422.
(e) Voluntary. The Participant shall expressly acknowledge and agree
that participation in this Plan is voluntary, and that the Participant will be
solely responsible for all taxes to which he or she may become subject as a
consequence of participation in the Plan, the exercise of an Option or the
ownership, sale, transfer or other disposition of Shares acquired pursuant to
the exercise of an Option issued hereunder.
(f) 30-Day Waiting Period With Respect to Options Granted Prior to July
25, 1996. With respect only to Options granted hereunder prior to July 25, 1996,
there shall be a 30-day period between the date on which the Participant
exercises the Option pursuant to this Plan, and the issuance or transfer of the
Shares covered by such Option to the Participant, and the Participant must
remain an Employee at all times during such 30-day period in order to receive
the Shares.
(g) Share Certificates Held by Company. The original of any Share
certificates that are issued to a Participant upon exercise of a Stock Option
granted under the Plan may be held by the Plan Administrator as custodian for
the Participant, in the Plan Administrator's sole discretion. The issuance of
such certificates shall be recorded on the Company's stock ledger book and other
records so that the Participant is accorded all rights of a holder of Shares. At
a Participant's request, the Plan Administrator shall furnish to the Participant
a copy of the Share certificate(s) held by the Plan Administrator as custodian
for the Participant.
<PAGE>
(h) Other. Such other terms and conditions not inconsistent with the
Plan as the Plan Administrator shall specify.
7. Termination of Employment
(a) Death. If the Participant dies while an Employee, any Option which
was exercisable, in accordance with the Vesting Schedule, by such Participant on
the date of such Participant's death shall be exercisable by such Participant's
estate, heirs or legatees at any time prior to the expiration of one year after
the date of the Participant's death, but in no event after the expiration of the
Exercise Period applicable to such Option.
(b) Total Disability. If any Participant becomes permanently and
totally disabled within the meaning of Code Section 22(e)(3) while he or she is
an Employee, any Option held by the Participant which was exercisable, in
accordance with the Vesting Schedule, by the Participant on the date of such
disability shall be exercisable for a period of one year from the date such
Participant ceases Employment, but in no event after the expiration of the
Exercise Period applicable to such Option. If the Participant dies during such
one-year period, the executor, personal representative, distributee or legatee
of the Participant's estate shall have the right to exercise such Option during
the remainder of such period.
(c) Other. If there is a Termination of Employment of a Participant for
any reason not specified in Sections 7(a) or 7(b) hereof, any Option which was
exercisable, in accordance with the Vesting Schedule, by such Participant on the
date of such Termination shall be exercisable at any time prior to 30 days from
the date of such Termination, but in no event after the termination of the
Exercise Period applicable to such Option. If the Participant dies during such
30-day period, the executor, personal representative, legatee or distributee of
the Participant's estate shall have the right to exercise such Option during the
remainder of such period. The Plan Administrator shall have discretion with
respect to applying this Section 7(c) to members of the Board of Directors who
are Participants under the Plan.
8. Leave of Absence
If a Participant is granted a leave of absence (as defined in Regulations
ss.1.421-7(b)(2)) by the Company, the Plan Administrator may make such provision
respecting continuance of any Stock Option held by such Participant while such
Participant continues as an Employee as it may deem advisable, except that in no
event shall any Option become exercisable after the expiration of the Exercise
Period applicable to such Option.
<PAGE>
9. Compliance with Applicable Laws
No Stock Options shall be granted, and no Shares shall be issued or transferred
by the Company to a Participant pursuant to the Plan unless the Plan
Administrator, in its sole discretion, shall have first determined that all
registrations, approvals, exemptions, and any other action required by law to be
taken with respect to the Plan shall have been accomplished, including, but not
limited to, such action, if any, as is then required to comply with the
provisions of the Securities Act of 1933, the Securities Exchange Act of 1934,
any applicable state laws, and the requirements of any exchange on which the
Stock may, at the time, be listed.
10. Employment
No employee or other person shall have any claim or right to be granted a Stock
Option under the Plan. Nothing herein contained shall at any time be deemed to
give any Employee the right to be retained in the employ of the Company,
interfere with the right of the Company to discharge any Employee, give to the
Company the right to require any Employee to remain in its employ, or interfere
with any Employee's right to terminate employment.
11. Corporate Changes
(a) If any change in the number, class, rights or designation of
outstanding shares of Stock occurs by reason of a stock split, recapitalization,
stock dividend, reclassification, or other similar transaction, the maximum
aggregate number and class of Shares reserved under the Plan or the exercise
price of all outstanding Stock Options may be appropriately adjusted by the
Board whose determination in such regard shall be conclusive. When such
adjustment is made, the number of Shares issuable or transferable to
Participants upon the exercise of outstanding Stock Options, or the exercise
price of such Options, as the case may be, shall likewise be appropriately
adjusted by the Board.
(b) If the Company becomes a party or subject to a Reorganization
Transaction, or if there is an Offer for shares of the Stock, the Board may: (1)
determine what Participants shall be entitled to receive, in substitution for
Shares issuable or transferable to them upon the exercise of outstanding Stock
Options, in the form of stock, securities, cash or other property to be received
by owners of Stock of the Company as a result of such Reorganization Transaction
or Offer; provided, however, that the aggregate fair market value of the stock,
securities, cash or other property subject to the Options immediately after such
substitution shall be no greater than the aggregate Fair Market Value of the
Shares subject to such Options immediately before such substitution; (2) upon
written notice to Participants, provide that the Participant's Options shall be
terminated unless exercised in accordance with the Plan within thirty (30) days
after the date of such notice; or (3) take any other action with respect to any
outstanding Stock Options which it deems to be appropriate; provided that under
no circumstances shall any such Board determination increase the length of the
Exercise Periods applicable to the Options.
<PAGE>
12. Transferability of Shares
(a) If a Participant acquires Shares pursuant to the terms of this Plan
and there is, subsequently, a Termination of Employment with the Company, either
voluntarily or involuntarily, such Employee shall be obligated to offer to sell
within fifteen (15) days to the Company and the Company shall be obligated to
purchase from the Participant the Shares so acquired (other than Shares of the
Company for which there shall be a public market). If the termination is by
reason of the death of the Participant, the obligation to offer the Shares shall
pass with the Shares to the Participant's executor, legal representative,
distributee, or legatee. At the discretion of the Plan Administrator this
Section 12 shall not apply to members of the Board of Directors who are
Participants under the Plan.
Closing with respect to the repurchase of the Shares described
in the prior paragraph shall take place at the offices of the Company within
thirty (30) days of the date of Termination of Employment (or, in the case of
the death of the Participant, within thirty (30) days of the exercise of the
Option pursuant to Section 7(a) hereof). At the sole discretion of the Company,
however, the date of Closing may be postponed until the first business day
following the date which is the one year anniversary of the date the Shares were
transferred to the Participant pursuant to the Option.
The purchase price for the Shares to be purchased hereunder,
other than in the event the Participant is dismissed from Employment with the
Company for cause, shall be the Fair Market Value of such Shares (determined in
accordance with Section 2(f) hereof) as of the date of Termination of
Employment. If a Participant is dismissed from Employment with the Company for
cause, the purchase price of those Shares acquired by the Employee pursuant to
the exercise of Stock Options shall be equal to their Fair Market Value as
determined above or the Participant's exercise price for those Shares, whichever
is less.
(b) The Shares acquired pursuant to the Plan shall and all share
certificates representing Shares so acquired shall contain a legend stating that
transfer of such Shares is restricted in accordance with the terms of this Plan.
<PAGE>
13. Miscellaneous
(a) Effective Date and Duration of the Plan. This Plan shall become
effective upon the approval thereof by the holders of a majority of the
outstanding shares of stock of the Company entitled to vote thereon within
twelve months after the Plan is adopted by the Board of Directors. Unless sooner
terminated, the Plan shall terminate ten years from the date of shareholder
approval, or the date the Plan is adopted, whichever is earlier.
(b) Effect Upon Other Plans. The adoption of the Plan shall not affect
any stock option or other compensation or incentive plan in effect for the
Company or any Subsidiary, and the Plan shall not preclude the Board from
establishing any other forms of incentive, bonus or other compensation for
Employees.
(c) Termination. The right to grant Stock Options under the Plan shall
terminate automatically at the close of business on the tenth anniversary of the
effective date of the Plan, and thereafter, the function of the Plan
Administrator shall be limited to the administration of Options previously
granted. The Board shall have the right to suspend or terminate the Plan at any
time provided that no action shall, without the consent of the Participant,
adversely affect any rights or obligations under any Options previously granted
to the Participant. The Plan may be terminated at any time by the shareholders
of the Company in the manner provided by law.
(d) Amendment of the Plan. The Board may modify or amend the Plan in
any respect, except that without shareholder approval the Board may not, unless
otherwise provided specifically herein, (1) increase the maximum number of
Shares set forth in Section 4(a) hereof; (2) withdraw administration of the Plan
from the Plan Administrator constituted in the manner provided in Section 3(a)
hereof; (3) materially increase the benefits accruing to Participants; or (4)
materially modify the requirements as to eligibility for participation in the
Plan as set forth in Section 5 hereof. Any modification or amendment of the Plan
shall not, without the consent of the Participant, adversely affect any rights
or obligations under Options previously granted to the Participant. Subject to
the foregoing, the Plan may be amended at any time by the shareholders of the
Company in the manner provided by law. The Plan Administrator may, with the
consent of a Participant, amend an outstanding Option held by a Participant, in
a manner not inconsistent with the Plan.
(e) Assignability of Options. No Stock Options shall be assignable or
transferable by a Participant except by will or by the laws of descent and
distribution. During the life of the Participant, Options shall be exercisable
only by such Participant. No Participant shall have any rights as a shareholder
with respect to any Shares subject to an Option until the date of issuance of
stock certificates to such Participant for such Shares. Except as otherwise
expressly provided herein, no adjustment shall be made for dividends or other
shareholder rights for which the record date is prior to the date such stock
certificates are issued.
(f) Binding Effect. Any delivery of Shares upon the exercise of Stock
Options and any delivery of cash in settlement of an Option to any Participant
or former Participant or such Participant's legal representative or to any
beneficiary of such Participant in accordance with the provisions of this Plan
shall be in full satisfaction of all claims with respect to such Options which
such Participant, representative or beneficiary may have against the Company,
Plan Administrator or any member of the Plan Administrator. This Plan shall be
binding upon the beneficiaries, heirs, executors, administrators, distributees
and assigns of the Participants and the successors and assigns of the Company.
(g) Governing Law. This Plan shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
(h) Compliance with Securities and Exchange Commission Rule 16b-3.
Notwithstanding anything contained in this Plan to the contrary, commencing July
25, 1996, no Options shall be granted to any person who may be deemed to be an
"insider" within the meaning of Securities and Exchange Commission Rule 16b-3
except as follows:
(i) Formula Plan for Outside Directors. Each outside
member of the Board of Directors (i.e., a director who is not employed by the
Company) shall automatically be granted an Option for 10,000 Shares upon initial
election to the Board of Directors, and each outside member of the Board of
Directors shall automatically be granted an Option for 2,000 Shares every two
years thereafter following re-election to the Company's Board of Directors.
<PAGE>
(ii) Other Insiders. All other "insiders" shall be
granted Options only upon recommendation of the Committee and approval by the
Board of Directors.
(iii) It is the intent of this subsection 13(h) that
profits resulting from the exercise of Options granted to "insiders" shall not
be subject to the short-swing profit recovery provisions of section 16 of the
Securities Exchange Act but shall instead be exempt from such provisions
pursuant to Rule 16b-3 or otherwise. Accordingly, this subsection 13(h) shall be
construed and administered in such a manner as to result in the foregoing.
<PAGE>
EXHIBIT 23
The Board of Directors
Integrated Systems Consulting Group, Inc.:
We consent to incorporation by reference in the registration statement No.
333-05473 on Form S-8 of Integrated Systems Consulting Group, Inc. of our report
dated January 23, 1997, relating to the consolidated balance sheets of
Integrated Systems Consulting Group, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, and related schedule, which report appears in
the December 31, 1996 annual report on Form 10-K of Integrated Systems
Consulting Group, Inc.
KPMG Peat Marwick LLP
Philadelphia, PA
February 18, 1997
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